As we start 2025, you may be considering marking the New Year with some new habits. This may be to exercise more, create a better work-life balance, or to get more from your finances.
If it’s the latter, there are steps you can take to help secure your financial wellbeing both now and into the future. Read on to discover three powerful steps that could take to help secure your long-term finances.
Consider investing to help protect the real term value of your wealth
The increasing price of goods and services over the long-term is measured by inflation, which means it has the potential to affect everything from your utility bills to your weekly shop. Furthermore, inflation can reduce the value of your money in real terms over time, as £100 is likely to buy you more today than it will in the future.
To demonstrate how inflation could reduce the value of your money in real terms, you may want to consider the BoE’s inflation calculator.
It shows that you would need £176.57 in November 2024 to have the same spending power as £100 in November 2004. This means your money needed to grow by more than 75% just to keep pace with the rising cost of living. If it didn’t, it was reducing in value in real terms.
While the Bank of England is targeted to keep inflation at below 2%, the Office for National Statistics revealed that it stood at 2.6% in November 2024. As a result, the value of your money may reduce over the long-term if it’s not growing at the same rate as inflation.
One way you may be able to help protect your cash from the effects of inflation is to consider investing it. This is because historically shares have tended to outperform cash savings over the long-term.
This was highlighted in an article by This is Money, which pointed to the 2023 Barclays Equity Gilt Study. It tracked the nominal performance of £100 invested in cash, bonds or shares between 1899 and 2022, and made for interesting reading.
It found that shares provided a real average annual return of 2.9% during the 20 years leading up to 2022, while cash returned -1.1%. This means investing your money in 2025 to help protect it from the long-term effects of inflation might be a shrewd financial step.
That said, please remember that investing carries risk, and past performance is no guarantee of future performance. You may receive less than you originally invested. A financial adviser will help you to understand the risks involved with investing, and whether it is likely to be the right option for you.
Contribute to your retirement fund
While your retirement may be some time off, it’s important to ensure you’re contributing enough money into your pension pot to fund the lifestyle you would want when you stop working. There are many different ways to fund your retirement, however the Income Tax relief provided by pension schemes means that every £100 you contribute may only cost you:
- £80 if you’re a 20% basic-rate taxpayer
- £60 if you’re a 40% higher-rate taxpayer
- £55 if you’re a 45% additional-rate taxpayer.
As you can see, this means pensions can be a cost-effective way to save for the retirement you dream of. In addition to this, pensions normally benefit from compound growth, which is where the growth it has already made is exposed to further potential growth in the future.
To demonstrate the powerful effects of compounding, you may want to consider the following. If you use a compound growth calculator, you will see that if you invested £100,000 and achieve an average growth of 3% every year, you could have around £103,000 at the end of the first year.
As long as you leave the money invested, the following year the growth will be on £103,000, which means it could be worth £106,175 at the end of year two. If you remain invested for 10 years, your initial investment could be worth nearly £135,000 due to compound interest.
By comparison, if you had received 3% simple interest, you would have received £3,000 every year that would have returned £30,000 in total. Compounding has therefore boosted your returns by an additional £4,935.
As such, starting 2025 by ensuring you’re contributing enough to your pension might be a shrewd financial strategy.
Create a financial safety net
Future proofing your wealth against unexpected and unwanted events is central to a good financial plan. Doing so can help you and your loved ones to maintain the lifestyle you’re accustomed to when life throws you a curve ball.
Broadly speaking, a financial safety net should include:
- protecting your income in case you’re diagnosed with a serious illness or have an accident, which means you’re unable to work
- life cover could ensure your family receive a lump sum to pay off the mortgage if the worst happens to you, which could help to ensure they can remain in their home
- having an adequate emergency fund so that you can deal with unexpected financial events, such as needing to replace your central heating boiler.
Having these provides peace of mind that whatever happens in 2025 or beyond, you and your loved ones are much more likely to be financially secure over the long-term.
Get in touch
If you would like to discuss these actions, or any others you could take to ensure your financial security and get more from your wealth, please contact us on 0333 010 0008. Our professional advisers will help you understand the options that are best suited to you and your circumstances, and how to protect your lifestyle no matter what happens in the future.
Friday 3 January 2025